What Is Financial Performance?
Financial performance is a subjective measure of how well a firm can use assets from its primary mode of business and generate revenues. The term is also used as a general measure of a firm's overall financial health over a given period.
Analysts and investors use financial performance to compare similar firms across the same industry or to compare industries or sectors in aggregate.
- Financial performance tells investors about the general well-being of a firm. It's a snapshot of its economic health and the job its management is doing.
- A key document in reporting corporate financial performance is Form 10-K, which all public companies are required to publish annually.
- Financial statements used in evaluating overall financial performance include the balance sheet, the income statement, and the statement of cash flows.
- Financial performance indicators are quantifiable metrics used to measure how well a company is doing.
- No single measure should be used to define the financial performance of a firm.
Understanding Financial Performance
There are many stakeholders in a company, including trade creditors, bondholders, investors, employees, and management. Each group has its own interest in tracking the financial performance of a company. The financial performance identifies how well a company generates revenues and manages its assets, liabilities, and the financial interests of its stake- and stockholders.
There are many ways to measure financial performance, but all measures should be taken in aggregate. Line items, such as revenue from operations, operating income, or cash flow from operations can be used, as well as total unit sales. Furthermore, the analyst or investor may wish to look deeper into financial statements and seek out margin growth rates or any declining debt. Six Sigma methods focus on this aspect.
Recording Financial Performance
A key document in reporting corporate financial performance, one heavily relied on by research analysts, is Form 10-K. The Securities and Exchange Commission (SEC) requires all public companies to file and publish this annual document. Its purpose is to provide stakeholders with accurate and reliable data and information that provide an overview of the company's financial health.
Independent accountants audit the information in a 10-K, and company management signs it and other disclosure documents. As a result, the 10K represents the most comprehensive source of information on financial performance made available to investors annually.
A company's Form 10-K has to be accessible to the public. Anyone who wishes to examine one can go to the SEC's Electronic Data Gathering, Analysis and Retrieval (EDGAR) database. You can search by company name, ticker symbol, or SEC Central Index Key (CIK). Many companies also post their 10-Ks on their websites, in an "Investor Relations" section.
Although the terms are sometimes used interchangeably, a company's Form 10-K is not the same as its annual report. Both include information about the company and its financial performance over the last year. But the annual report is more of a polished publication, lavishly illustrated and describing various projects and initiatives the company undertakes. The 10-K lacks such photos and graphics but generally goes into more financial details and calculations.
Included in the 10K are three financial statements: the balance sheet, the income statement, and the cash flow statement.
The balance sheet is a snapshot of the finances of an organization as of a particular date. It provides an overview of how well the company manages its assets and liabilities. Analysts can find information about long-term vs. short-term debt on the balance sheet. They can also find information about what kind of assets the company owns and what percentage of assets are financed with liabilities vs. stockholders' equity.
The income statement provides a summary of operations for the entire year. The income statement starts with sales or revenues and ends with net income. Also referred to as the profit and loss statement, the income statement provides the gross profit margin, the cost of goods sold, operating profit margin, and net profit margin. It also provides an overview of the number of shares outstanding, as well as a comparison against the performance of the prior year.
Cash Flow Statement
The cash flow statement is a combination of both the income statement and the balance sheet. For some analysts, the cash flow statement is the most important financial statement because it provides a reconciliation between net income and cash flow. This is where analysts see how much the company spent on stock repurchases, dividends, and capital expenditures. It also provides the source and uses of cash flow from operations, investing, and financing.
Example of Financial Performance
As an example of financial performance analysis, let's look at the Coca-Cola Company's year-over-year performance in 2020 and 2019.
|Comparing Coca-Cola's Performance|
|($ in millions except per-share data)||2019||2020|
|Net operating revenues||$37,266||$33,014|
|Consolidated net income||$ 8,985||$ 7,768|
|Basic net income per share||$ 2.09||$ 1.80|
|Cash dividends||$ 1.60||$ 1.64|
|Other liabilities||$ 8,510||$ 9,453|
Plainly put, Coca-Cola's performance was not great in 2020. Net revenues declined 11% from the previous year. Gross profit and income per share fell 14%.
The company attributed its performance to the problems caused by the coronavirus pandemic, along with "a currency headwind" (a reference to the fact that it's a global company, with many operations and markets overseas). Coca-Cola derives more than a third of its revenue from non-retail channels, like restaurants and concession stands. So the shuttering of public venues and the stay-at-home mandates hurt its sales.
Financial Performance FAQs
Why Is Financial Performance Important?
A company's financial performance tells investors about its general well-being. It's a snapshot of its economic health and the job its management is doing—providing insight into the future: whether its operations and profits are on track to grow, and the outlook for its stock.
What Are Financial Performance Indicators?
Financial performance indicators, also known as key performance indicators (KPIs), are quantifiable measurements used to determine, track, and project the economic well-being of a business. They act as tools for both corporate insiders (like management and board members) and outsiders (like research analysts and investors) to analyze how well the company is doing—especially in regard to competitors—and identify where strengths and weaknesses lie.
The most widely used financial performance indicators include:
- Gross profit /gross profit margin: the amount of revenue made from sales after subtracting production costs, and the percentage amount a company earns per dollar of sales
- Net profit/net profit margin: the amount of revenue from sales after subtracting all related business expenses and taxes, and the related ratio of earnings per dollar of sales
- Working capital: immediately available or highly liquid funds, used to finance day-to-day operations
- Operating cash flow: the amount of money being generated by regular business operations
- Current ratio: a measure of solvency—the total assets divided by total liabilities
- Debt-to-equity ratio: a company’s total liabilities divided by its shareholder equity
- Quick ratio: another solvency measure, that calculates the percentage of very liquid current assets (cash, securities, accounts receivables) against total liabilities
- Inventory turnover: how much inventory is sold within a certain period, and how often the entire inventory was sold
- Return on equity: net income divided by shareholder equity (a company’s assets minus its debts)
There are other specialized financial performance indicators that are more specific to certain industries. For example, companies whose sales of goods and services vary depending on the time of the year might use seasonality as a metric, measuring how a certain period or season affects the figures and outcomes.
What Is a Financial Performance Analysis?
Financial analysis refers to the process of studying and assessing a company’s financial statements—a collection of data and figures organized according to recognized accounting principles. The aim is to understand the company's business model, the profitability (or loss) of its operations, and how it's spending, investing, and generally using its money—summarizing the company by the numbers, so to speak.
A financial performance analysis examines the company at a specific period in time—usually, the most recent fiscal quarter or year. The balance sheet, the income statement, and the cash flow statement are three of the most significant financial statements used in performance analysis.
Financial performance analysis can focus on different areas. Types of analysis can include a specific examination of a firm's:
- Working capital: the difference between a company’s current assets, such as cash, accounts receivable (customers’ unpaid bills) and inventories of raw materials and finished goods, and its current liabilities
- Financial structure: the mix of debt and equity that a company uses to finance its operations
- Activity analysis: the factors involved in the cost and pricing of goods and services
- Profitability analysis: how much money the business actually clears, after expenses and taxes
How Can I Improve My Financial Performance?
A company's financial performance can be improved in a number of ways. Of course, trying to identify any roadblocks or friction points—and the source of these problems—is the first step. Other strategies include:
- Improving cash flow: keep better track of income/outgoes, step up collection of accounts receivable, adjust payment options and prices if necessary
- Selling unwanted/unused assets
- Revamping budgets
- Reducing expenses
- Consolidating or refinancing current debt; applying for government loans or grants
- Analyzing financial statements and performance indicators, ideally with a professional's help
What Are the Types of Financial Statements?
While there are many types of financial statements, the big three are:
- Balance sheet, which lists a business’ assets/revenues, liabilities/obligations, and owners’ equity at a specific point in time.
- Income statement, which summarizes results from business operations—revenues, expenses, and profits or losses during a specific period.
- Cash flow statement, which complements the balance sheet and income statement. Categorized into operating, investing, and financing activities, it captures how funds are employed—literally, how the cash flows—throughout the business.
The Bottom Line
The financial performance of a company is based on numbers. But in the end, it imparts an impression about the company and its soundness. A financial analysis of a company's financial statements, summarized in annual reports and Form K-10s—is essential for any serious investor seeking to understand and value a company properly.
However, it's also important to realize that financial performance reflects the past, and is never an exact indicator of the future. Nor does it exist in a vacuum. Those evaluating a company's financial performance should always consider it in light of other, comparable businesses; the overall industry; and the company's own history.